Hindustan Zinc (HZL) has declared second interim dividend of Rs 27.5/share that is significantly above Street’s R15-20 estimate. We perceive it as a positive for shareholders as the company is returning excess cash. Ergo, HZL’s cash balance is expected to fall to Rs 150billion. However, we do not see it as a point of concern as free cash flow generation is pegged at Rs 100 billion each in FY18 and FY19 on account of robust zinc price outlook and capacity ramp up. As a result of higher payout than expected, we revise FY18/19E EPS down 5% each.
Maintain‘BUY’ with revised target price of Rs 335 (Rs 360earlier), implying exit P/E of 14.4x FY19E, which is at a discount to global peers.
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Cash outgo from the second interim dividend is pegged at R140 billion, reducing the cash balance to R150 billion. However, we forecast HZL’s EBITDA CAGR at 12% in FY17-19 on account of capacity ramp up with mined metal production expected to jump from 895kt to 1,095kt over the same period. This is expected to generate free cash flow of R100 billion on an average in FY18E and FY19E each.
Strong recovery in LME prices, up by 61% y-o-y in CY16 and up 18% YTDCY17 to $ 2,836/tonne now, along with supply constraints following mine closures provide a stable growth outlook for Zinc going forward. We like HZL for its ability to deliver 50% EBITDA margins and maintain good dividend yield. It is among the lowest cost in the world and has a strong balance sheet with no debt.
